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Study on Good Governance Practice in FMCG Sector'

Pacific Business Review InternationalVolume 11 Issue 10, April 2019

Abstract

The Corporate Governance is an important aspect for the implementation of the principles of and codes which has a positive impact on the performance of the firms. During the course of time, various mechanisms of Corporate Governance have been studied in relation to the performance of the firms and most of them have also been used. Corporate Governance framework ensures effective engagement with all the stakeholders of the companies and also brings transparency between the company authorities and the stakeholders. Corporate Governance is practiced in all the industries of the economy. In our paper, we present the study on the similarities and the differences of the good Governance practices between the various companies under the sector of Fast Moving Consumer Goods (FMCG) sector. The fourth largest sector in the economy is FMCG. This study attempts to learn the good Governance practices followed in this sector and the key differentiation philosophy followed by them.

KEY WORD:- Corporate Governance, FMCG, Good Governance practices, Committee, Board of directors

Introduction

Corporate Governance

Corporate Governance is a system of rules, process, practices and structures through which a company manages its business to attain its financial, operational and strategic goals along with long term sustainability. It involves balancing the interest of various stakeholders, management, customers, suppliers, financiers, government and the community.

Definition of Corporate Governance:

The Securities and Exchange Board of India Committee on Corporate Governance defines Corporate Governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. “India is a growing economy and to safeguard the interest of the investors and to clearly define the roles of the management Corporate Governance plays a major role.

Prof. Prajakta DhuruAsst. Professor,

IES MCRC, Mumbai

28

Sagar MakhijaniM.M.S Student,

IES MCRC Mumbai

Shraddha ShettyM.M.S Student,

IES MCRC Student

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Corporate Governance has particular emphasis on their duties and responsibility towards the company. The three groups board plays a central role in Corporate Governance by

guiding, monitoring, establishing, overseeing and Shareholders, Board of directors and Management, it may

achieving managerial objectives of the organization. also specify the power other stakeholders like employees,

Corporate Governance policies should be reliable and customers, creditors and suppliers.

credible to attract investors, reduce the cost of capital, Principles of Corporate Governance ensure functioning and sources of financing.

1.Ensuring the basis of effective Corporate Governance Fast Moving Consumer Goods (FMCG)framework

The fourth largest sector in the economy is FMCG(Fast 2.The rights of shareholders and key functions protecting Moving Consumer Goods). The FMCG sector has and facilitated witnessed a growth of US$ 31.6 billion in 2011 to US$

52.75 billion in 2017-18. The sector is further expected to 3.Equitable treatment of shareholders

grow at a Compound Annual Growth Rate (CAGR) of 4.The role of stakeholders in Corporate Governance 27.86 per cent to reach US$ 103.7 billion by 2020.

5.Disclosure and transparency List of Top 10 FMCG Leading Companies in India (2018)

6.The responsibility of the board-monitoring management and accountability to shareholders � Hindustan Unilever Limited

Good Corporate Governance � Colgate – Palmolive

Good Corporate Governance creates transparency and � ITC Limitedresponsiveness to the rules and controls of the

� Nestleshareholders, directors and officers. Companies strive for a high level of Corporate Governance. Today companies � Parle Agrolook ahead of profits and aim in creating good corporate

� Britannia industries limitedcitizens through environmental awareness, ethical behavior and sound Corporate Governance practices. Good � Marico LimitedGovernance brings positive impact to the performance and

� Procter and Gamblelong term viability of every company.

� The Godrej GroupEight characteristics of Good Governance

� AMULParticipation, rule of law, transparency, responsiveness, consensus orientation, equity, effective, efficiency and Selected Companies for the Studyaccountability.

Emami GroupBenefits of Good Corporate Governance Practices

Result oriented board of directors, Shred management accountability, Internal evaluation and control, risk management, efficient performance. In a highly competitive business environment good governance is of great significance in relation to increasing capital, securing debts, qualified directors, talent management, employee and stakeholder satisfaction, growth & acquisition.

The foundation of Corporate Governanceare based on law based on corporate legislation, securities laws and policies, security regulators and the decisions of the court. The directors of the company are expected to serve loyally towards the company and in the interest and good faith of the company. They are also based on other sources like the stock exchange, interest groups, media and others. Corporate Governance is an aid to the directors to meet

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Volume 11 Issue 10, April 2019

The inception of Emami Group took place in the mid-70s in branded personal care products, edible oils, fabric care the state of West Bengal. In the year 1978, Emami Group products and processed foods. Currently present in 25 acquired a 100years old company Himami Ltd, which countries across Asia and Africa. The members associates proved to be the turning point for Emami Group. Now, consumer investors and society are empowered with Emami group has successfully established its brands freedom and opportunity.through a very strong endorsement. A niche category

Daburplayer and innovator is the fastest growing FMCG companies.The key brands are the strongest market leaders. Zandu is one of their strongest Ayurvedic brand.

ITC LTD.

Dabur India is a world leader in Ayurveda. The 134 year old Ayurvedic Company started operating in 1884 as an Ayurvedic Medicines company. Since its inception, they had a very humble beginning in the city of Calcutta,Dabur

ITC started in the Tobacco sector, had entered the FMCG has come a very long way today to become one of the sector in the early 2000s. A multi-business conglomerate, biggest Indian owned consumer goods companies with the ITC has climbed its way to the top of the mountain in the largest herbal and natural products portfolio in the world.FMCG Sector posing a challenge to the giants in the sector.

Objective of the studyLeading food and beverage company.ITC believes in

The study is focused towards learning the good sustained value creation, operating profits and cash profits. Governance policies in the FMCG sector it further aims It is a market leader and is the only FMCG company to be towards featured in Forbes 2000 list in 2016.

Marico 1. To understand the Corporate Governance Practices by leading FMCG companies in India

2. To understand the good Corporate Governance Practices and the organization philosophies

Research Methodology

The study is based on the Corporate Governance Practices in different companies under the FMCG sector. The annual report of the leading Fast Moving Consumer Goods(FMCG) companies is studied and the similarities and differences in the practices followed by them are analyzed. The various Corporate Governance philosophy followed by them in this competitive environment is studied. Inferences and conclusions drawn are on the bases of secondary data. The sample for this study comprises of four mega companies in the FMCG sector, ITC Ltd.,

Marico limited is one of India's leading consumer products Marico, Emami Group and Dabur. All the four companies companies in the beauty and wellness space. Started in the are listed in Bombay Stock Exchange and influence the year 1988, the company engaged in manufacturing of stock movement of this sector.

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Literature Review listed companies were studied and their Corporate Governance practices were examined. The study

Hitesh J Shukla (2009)examined Governance practices concluded that there is considerable scope of improvement

followed by Indian FMCG sector within the Indian in the Corporate Governance disclosure practices followed

regulatory framework. Among the renowned FMCG by the companies.

companies, observations show ITC scored the highest (79) points followed by Tata Tea (77) points, HUL (72) points SenanNeeti (2011)have analyzed the study of Corporate and Nestle (69) points. ITC, Tata Tea and HUL figured in Governance in public and private enterprises in India. The the criteria of very good and Nestle figured in the criteria of annual reports of 77 listed Indian companies from the year good. 2008-2009 was studied. The study revealed the private

sector companies followed high standard of Corporate Bhardwaj N and Rao B.R (2014) have examined and

Governance disclosure as compared to the public sector benchmarked the Corporate Governance practices of the

companies.CNX Nifty 50 companies with revised clause 49. It further concluded that majority of the companies followed the Analysis and Findingspractices mentioned in the clause 49 and a few disclosure

The 4th largest sector in Indian economy is Fast moving were beyond the requirement.

consumer goods (FMCG) .the sector is divided into three Gupta et al (2003),analyzed the Corporate Governance main segments namely food and beverages, healthcare and report of 30 companies listed in BSE for the year 2001-02 household and personal care. The key growth divers for the and 2002-03. The findings of the report said that the consumer market are Growing awareness, easier access, reporting practices of the company vary to a large extent. and changing lifestyles.

NeetiSanam and SangeetaYadav (2011)found out that The study is done on the Good Governance Practices for despite impressive Corporate Governance reforms, the the companies of Dabur, ITC Ltd., Marico and Emami Indian firms only disclosed a moderate level of financial Group.disclosure. The financial reporting quality required further

Based on the study, the following table shows the improvement and enforcement of legal and regulatory

similarities which the companies have under the Corporate structure.

Governance.AnuragAhuja and B.S. Bhatia (2010) have analyzed the Corporate Governance disclosure. The annual reports of 50

Based on the above table, the Committees which are oversight of the corporation's global risk management formed by these companies are fewin common. Their framework. The Committee also consists of few Executive function, roles and responsibilities are quiet similar Directors who assists the Board of Directors in fulfilling its concerning the committees mentioned in the above table. oversight responsibilities in regard with appetite of the

Corporation and the Risk Management and Compliance Risk Management Committee:

framework and governance structure which supports it.The Risk Management Committee is a committee which

The FMCG sector is subject to varied business risks consists of Board of Directors that has its sole and

like: exclusive function, responsibility for the policies of Risk Management for the operations of the company and One of the major risk that FMCG companies face is the

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rapid shift in the consumer tastes and preferences. The The committee has to review the structure, size and consumer behaviour is unpredictable in nature. A change in composition which is by the board i order to compare its the product brought by a competitor can change the taste current position and make recommendations accordingly and the preferences of the consumer. The other risk or to Board with regard to any changes. They also have give challenge that FMCG company face are the unstable full consideration to succession planning for directors and commodity/product prices prevailing in the market. A other senior executives, taking into account the challenges small change in the price of the commodity can increase or and opportunities facing the company, and what skills and decrease the sale of the company. expertise are therefore needed on the Board in the future.

The Committee is also responsible in identifying and Audit Committee:

nominating for the approval of the Board.The Audit Committee being the central pillar of effective

Before making an appointment, the committee has to Corporate Governance, has the best position to offer

evaluate the balance of skills, knowledge and experience effective oversight of the performance, independence and

on the board. The Committee has to regularly review the objectivity of the auditor and also the quality of the audit.

leadership needs of the organization, both executive and The audit committee's role is also something can be built

non-executive, with a view of ensuring the continued upon.The Audit Committee acts as the link between the

ability of the organization to compete effectively in the statutory auditors, the internal auditors and the Board of

market place. The Committee needs to evaluate the Directors of the Company. The terms of reference of the

performance of non-executive directors to ensure they are Audit Committee are as per the guidelines set out in

spending enough time to fulfil their duties.Regulation 18 of the SEBI Listing Regulations, 2015 read with Section 177 of the Companies Act, 2013.The internal Corporate Social Responsibility Committee:audi t depar tment governs i ts audi t through

In the words of Mallen Baker- “CSR is about how modules/checklists to carry out process- wise audit and to

companies manage their business process to produce an ensure effective discharges of their duties and compliance

overall positive impact on society”. The Corporate Social with SEBI Listing Regulations, 2015. The Audit process

Responsibility Committee is appointed by the Board of being used by Internal Audit Department is also reviewed

Directors. The Committee is been set up to promote a from time to time with a view to bring it in line with the

culture that emphasizes and sets high standards for regulatory framework.

corporate social responsibility and also reviews corporate Roles and Responsibilities of Audit Committee performance against those standards. From Social

Responsibility perspective, the Committee will consider The Committee has to oversee the Company's financial

the impact of the Corporation's business, operations and reporting process and the disclosure of its financial

programs.information to ensure that the financial statements are correct, sufficient and credible. The committee also need to Roles and Responsibility of CSR Committee:recommend the appointment, remuneration, terms of

As per the Company Act, 2013, The CSR Committee has to appointment and removal of Statutory Auditors, the

formulate and recommend to the Board, a CSR Policy appointment, remuneration and removal of Cost Auditors,

which shall indicate the activities to be undertaken by the where necessary. The other role that committee has to

Company. They also need to recommend the amount of perform is to approve transactions of the Company with

expenditure which are to be incurred on the activities as related parties, including modifications thereto.

above, and also monitor the expenses incurred as per the Nomination and Remuneration Committee: Corporate Social Responsibility policy of the Company

from time to time.The Nomination and Remuneration Committee of the Board, identifies people who are qualified to become Stakeholders Relationship Committee:Directors and formulates criteria valuate the performance

The Committee is formed in order to resolve any of Directors and the Board as a whole. The Committee

grievances of the security holders of the company includes the Chairman of the company who is an

including the complaints regarding the transfer of shares, independent Director. Along with him includes two-three

non-receipt of annual reports, non-receipt of dividends etc. Non-Executive Directors.

The committee comprises of a Chairperson who is an Roles and Responsibilities of the Nomination and independent Director. There may be few executives Remuneration Committee are: working under him which differs from company to

company.

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Roles and Responsibilities of Stakeholders Further the audit committee periodically reviews the Relationship Committee: existence and functioning of the mechanism.

The committee has to look for the transfer/ transmission of Subsidiary Companiesthe shares. They also needs to redress to the complaints/

Subsidiary companies are the companies which are grievances received from the shareholders or investors.

completely owned by the parent company. These The committee needs to approve, register or refuse to

companies are managed by the respective board of transfer of shares and securities. Post the authorization

directors in the best interest of those companies and their from the Board of Directors of the company, the Committee

shareholders.has to print the Share Certificates.

At ITC ltd, the Subsidiary Companies are managed by their Corporate Governance Philosophy

respective Board of Directors. The minutes of the Board The company follows established practices for systems meetings of the Subsidiary Companies and the details of procedures and policies to ensure they have well informed significant transactions and arrangements are placed and equipped the board of directors and the management before the Board of Directors of the company. The with a strategic system to create long term shareholder performance review reports of the Subsidiary companies of value. Corporate Governance aims at achieving high level ITC ltd. are been placed before the Board of Directors of of transparency, equity in all facet of operations and the company on an half yearly basis. The Audit Committee interaction with stakeholders. of the company has the responsibility to review the

financial statements of the Subsidiary Companies.The companies studies showed that the philosophy differed everywhere. At Dabur Good Governance Practices forms Conclusionpart of business strategy. While at Emami Group Corporate

The present study is an endeavour to explore the Good Governance has been at focus for complete well-being of

Governance Practices in the FMCG sector in India. all constituents. At ITC, “The cornerstones of ITC's

Relying on the study of the Corporate Governance reports Governance Philosophy are trusteeship, transparency,

of the top FMCG companies namely ITC Ltd., Dabur, ethical corporate citizenship, empowerment, control and

Marico & Emami Group the similarities of governance accountability”. And at Marico, They believe that

practices along with its differences. From the study it can Corporate Governance is not an end in itself but is a catalyst

be over and done that companies believe in different in the process towards maximization of shareholder value.

policies, adopt different initiatives and practise new Whistle-Blower Policy / Vigil Mechanism methods for effective governance. Like the ITC Ltd. Code

of conduct by ITC and the Direct Touch Initiative by Dabur. The company has formed a Whistle Blower Policy / Vigil

Additionally there few momentous differences followed Mechanism as required under Section 17 of the Companies

by these companies.Act, 2013 and regulation 22 of listing regulation. Allow and encourage stakeholders to bring to the management notice References:concerns about unethical behavior, malpractices, wrongful

Corporate Governance and Indian FMCG Industry, 2009 - conduct, actual or violation of policies. Timely and

Hitesh J Shuklaconsistent organization response. Build a culture of

Source - Journal of Corporate Governancetransparency and trust. Provide protection against victimization.

Corporate Governance Practices in India , 2014 - Bhardwaj N and Rao B.R (2014)This mechanism has been widely communicated in all the

following companies ITC, Dabur, Marico and Emami. The Source - www.icmai.in

employees at ITC are expected to follow the ITC Code of Corporate Governance reforms and financial disclosures: conduct failing which demands for action. With further

A case of Indian Companies (2011)study it was seen that a different initiative followed at Dabur is the company has established a Direct Touch

Source - The IUP Journal of Corporate Governance Initiative, under which all Directors, employees/ business

Corporate Governance Reforms and Financial, associates have direct access to the chairman of the audit Disclosures: A Case of Indian Companiescommittee, and also to a three-member direct touch team

established for this purpose. The direct team comprises of Source - Ebsco host

one senior women member so the women employee of the company feel secure and free and report their policy.

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Volume 11 Issue 10, April 2019

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